By Denise Lugo
The insurance sector wants the FASB to grant special flexible accommodations to large reinsurers so they can adopt new insurance accounting rules at an effective date that works best for them, a workaround that might be tricky to develop.
The FASB in November deferred the accounting standard for long-term insurance contracts, but with split effective dates that require large companies to adopt the changes in 2022 and smaller companies in 2024.
The American Council of Life Insurers (ACLI) on January 6, 2020, said the effective date differences create costly hurdles for large reinsurers that do business with smaller reinsurance companies because resource-strapped smaller companies will not have the necessary data in time for the earlier reporting cycle of large SEC filers.
“This standard is an improvement, and it’s a major overhaul of how companies report their business, so these smaller reporting companies—reinsurers—are going to need that extra time to retool their resources,” Mike Monahan, ACLI’s senior director, accounting policy, said. “And so when you have a large SEC filer doing business with a smaller reporting company, that information is not yet available in the new format.”
Reinsurance activity is material for life insurers, according to National Association of Insurance Commissioners’ statistical data. Reserves held on life and annuity reinsurance assumed business at December 31, 2018, totaled more than $463 billion and reserve credit taken on similar reinsurance ceded business totaled over $808 billion.
ACLI has asked the board to provide an exception that states: “for reinsurance contracts between SEC filers and smaller reporting companies, or all other entities where the administration and/or evaluation of the business has not been transferred to or retained by the SEC filer, the effective date of the guidance would be for fiscal years on or after December 15, 2023.”
That change should be allowed on a contract-by-contract basis, with companies allowed the option to adopt the rules sooner if they choose, Monahan said.
In response to a question about whether the board would take up the topic, a FASB spokesperson said “as with all agenda requests, the FASB will review and consider it as part of our process.”
Adds Complexity, Problems
The FASB mid-November deferred Accounting Standards Update (ASU) No. 2018-12, Financial Services–Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, from 2021 to 2022 for public companies, from 2021 to 2024 for smaller reporting companies (SRCs) and from 2022 to 2024 for private companies and not-for-profit organizations. The insurance standard, which provides targeted rules relevant to life insurance and annuities contracts, took the board 16 years to complete. (See Subset of Companies Get Deferral on New FASB Rules for Credit Losses, Hedging, Leases, Insurance Rules in the November 19, 2019, edition of Accounting & Compliance Alert.)
Prior to issuing the deferral, several insurance companies in September comment letters told the board the date deferral would pose adoption issues for reinsurers unless they are granted a transition exception. Cigna Corp., Athene Holding Limited, and Unum Group, said the split in effective dates between large public and “all other companies” would create asymmetry and add cost and complexity for reinsurers’ rule adoption efforts. (See Finance Executives Say FASB’s Proposed Deferral for Insurance Accounting Would Create Mismatch for Reinsurers in the October 4, 2019, edition of ACA.)
The ACLI said it wrote to FASB over a month ago to raise the same issue the companies flagged, believing the board is waiting for a sector response. The matter was raised at two FASB board meetings, but the board did not move on the issue, wanting for more alternatives to be provided by the sector, Monahan said.
The organization in its November 27 letter said the effective date changes for large public companies that have assumed and/or ceded reinsurance relationships with smaller companies would have problems when the counterparty is responsible for the administration and/or valuation of the underlying contracts.
The letter states that additional data retention and measurement changes brought about by the new insurance rules, “will create considerable cost and effort for both the SEC filer and the counterparty to comply with the amended effective dates, especially when the effective dates are different, which creates a misalignment of business and financial reporting needs for both parties involved.”
This article originally appeared in the January 7, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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